THOMPSONVILLE, et al. v. FEDERAL INS. CO.

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Defendant Federal Insurance Company (FIC)
appeals by right from orders granting summary disposition in
favor of intervening plaintiff Michigan Township Participating
Plan (MTPP) on issues concerning a reinsurance contract. One
order found FIC liable to indemnify MTPP under the contract, and
a second order fixed MTPPs recovery from FIC at $91,500
plus interest. FIC also appeals the imposition of sanctions for
bringing a motion for reconsideration. On cross appeal, MTPP
argued that the trial court erred by refusing to award penalty
interest pursuant to the Uniform Trade Practices Act, MCL
500.2006; MSA 24.12006. We affirm in part, reverse in part, and
remand.

In March 1991, a fire destroyed an old
schoolhouse sometimes used as a community center, owned by the
Village of Thompsonville. The village was a participating member
of MTPP, a group self-insurance pool formed by intergovernmental
contract pursuant to MCL 124.5; MSA 5.4085(6.5). An insurance
policy issued by MTPP protected the village against fire loss
with respect to particular buildings. Under this policy, the
liability of MTPP with respect to

the old schoolhouse was limited to $181,500 for
the structure, and $10,000 for the contents. However, MTPP, the
primary insurer, had ceded risk related to the insured buildings
by entering into two reinsurance contracts: one with American
Commercial Liability Company (ACLIC), which assumed the first
$100,000 of risk, and a second reinsurance contract with FIC to
cover risk in excess of $100,000 but limited to $5 million.

After the fire, ACLIC filed a declaratory
judgment action against Thompsonville, seeking to avoid liability
under a clause in the primary policy which excluded coverage if,
at the time of the fire, the building was "vacant," as
that term is defined in the policy. Thompsonville then filed a
counter-complaint against ACLIC and a third-party complaint
against FIC. While these actions were pending, ACLIC went into
receivership and in due course its suit against Thompsonville was
dismissed for lack of progress. MTPP delivered to its insured,
Thompsonville, a series of payments which eventually totaled
$191,500, amounting to a settlement of Thompsonvilles claim
at the limits of its policy with MTPP. Thompsonville then was
dismissed from the lawsuit as an inappropriate party, and the
court allowed MTPP to intervene as plaintiff.

Thereafter, the two remaining parties, MTPP,
the primary insurer, and FIC, a reinsurer, filed motions for
summary disposition. The circuit court ruled that the former
schoolhouse was covered despite an address mistake in the primary
policy, that the building was not vacant within the policys
terms when the fire occurred, and that FIC was liable for
indemnification under its reinsurance contract with MTPP.
However, the court left to the parties an opportunity to
negotiate a settlement concerning the appropriate amount of
indemnification. When negotiations failed, MTPP moved again for
summary disposition.

In announcing its decision on the issue of
damages, the court remarked from the bench that MTPP
"probably put up too much money on this claim. How much too
much, I dont know off the top of my head." However,
the court then stated that, "as the linchpin" of its
decision, it would apply the "follow the fortunes"
doctrine which, the court explained, requires the "reinsurer
to reimburse the insured for payment of settled claims so long as
the payments were reasonably made in good faith." The court
declared that judgment would be for MTPP in the sum of $91,500,
the full amount by which its payments to Thompsonville exceeded
$100,000, plus interest. A motion for reconsideration filed by
FIC was denied, and the court ordered FIC to pay MTPP $250 as a
sanction for bringing the motion.

I

As a preliminary matter, we focus first on a
question of some significance that springs from the lower
courts adoption and application of a so-called "follow
the fortunes" doctrine as its basis for determining the
amount of indemnification owed by the reinsurer, FIC. Indeed, the
question was succinctly framed from the bench by the court itself
in these terms, "[D]oes Michigan law impose a
Follow-the-Fortunes doctrine when there is no express provision
in the contract adopting such[?]"

Insurance companies enter into reinsurance
agreements "in order to spread the risks on policies they
have written or to reduce required reserves." Colonial
American Life Ins Co v Commr of Internal Revenue, 491
US 244, 246; 109 S Ct 2408; 105 L Ed 2d 199 (1989). As this Court
has earlier observed, a reinsurance contract is an arrangement
"whereby one insurer for a consideration contracts with
another to indemnify it against loss or liability by reason of a
risk which the latter has assumed under a separate and distinct
contract as the insurer of a third person." Michigan
Millers Mutual Ins Co v Northern American Reinsurance Corp,
182 Mich App 410, 413; 452 NW2d 841 (1990), citing 13A Appleman,
Insurance Law & Practice, Sect. 7693, p 523.

When an insurer decides to transfer some of the
risk it has undertaken in a policy, the insurer "cedes"
a portion of the risk to another insurance company, which is the
reinsurer. Christiania General Ins Corp of New York v Great
American Ins Co, 979 F2d 268, 271 (CA 2, 1992). "A
reinsurance contract is essentially a contract of
indemnity." Couch on Insurance 3d Sect. 9:9, p 9-17.
The reinsurers obligation to indemnify the ceding insurer
"depends on the terms of the policy of reinsurance, and not
on the question whether the insured suffered a legal loss on the
original policy." Appleman, Sect. 7692, p 519. "If
it appears that no liability has attached against the original
insurer, there can be no recovery against the reinsurer, for
nothing exists upon which to base an indemnity." Couch,
Sect. 9:22, p 9-31. "Nor does the fact that the
original insurer has paid a claim establish that it is entitled
to indemnity from the reinsurer, for the claim might have been
one for which the insurer was not bound to make payment." Id.

While these principles generally apply, the
parties "may agree to such terms in the reinsurance
agreement as will bind the reinsurer to a settlement or other
adjustment of loss between the original insured and the original
insurer." Couch, Sect. 9:25, p 9-34. A provision
inserted in a reinsurance contract for that purpose is commonly
referred to as a "follow the fortunes" clause because
it requires that "the reinsurer will follow the
fortunes or be placed in the position of the
[insurer]." Bellefonte Reinsurance Co v Aetna
Casualty & Surety Co, 903 F2d 910, 912 (CA 2, 1990),
quoting Koehnen, "Administration and Maintenance of Business
in Force," Reinsurance 509 (Strain ed. 1980).

Although the "follow the fortunes"
doctrine is applicable in those instances where such a clause is
part of the agreement, we are confronted in this appeal with the
broad contention that such a provision is to be read into every
reinsurance contract. In advancing this proposition, the court
below relied heavily on International Surplus Lines Ins Co v
Certain Underwriters & Underwriting Syndicates at
Lloyds of London, 868 F Supp 917 (SD Ohio, 1994),
wherein a federal district court in Ohio ruled that even in the
absence of express contract language, "the Follow the
Fortunes doctrine applied to all reinsurance
contracts." Id. at 920. As authority to support its
ruling, the federal district court cited three cases. However, we
note that in each of those cases, the reinsurance contract at
issue contained specific language indicating incorporation of the
"follow the fortunes" doctrine. See Mentor Ins Co
(UK) Ltd v Brannkasse, 996 F2d 506, 516 (CA 2, 1993)
("The parties agree that the contract contains a
follow the fortunes clause."), Unigard
Security Ins Co v North River Ins Co, 762 F Supp 566, 586 (SD
NY, 1991) ("The Certificate binds Unigard to follow
the fortunes of North River on the Owens-Corning risk by
providing that [a]ll claims covered by this reinsurance
when settled by [North River] shall be binding on the Reinsurers,
who shall be bound to pay their proportion of such
settlements."), Christiania General Ins Corp of New
York, supra at 280 ("The parties contract
states that [t]he reinsurance provided under this
certificate shall follow coverage of [Great Americans]
policy.").[1]

In this appeal, MTPP concedes that the
reinsurance contract at issue "does not contain a specific
follow the fortunes clause." Moreover, MTPP is
unable to point to any Michigan authority for support of its
position that such a provision should be read into the policy.
Indeed, we find that Michigan guidance points in the opposite
direction. In Michigan Millers, supra, this Court
addressed a dispute between two insurance companies under a
contract of reinsurance. The reasoning and explanation of
reinsurance law provided by the Michigan Millers Court is
particularly instructive in this setting. There, our Court
pointed to 19 Couch on Insurance 2d, Sect. 80.66 pp 673-674,
to emphasize that "[t]he extent of the liability of the
reinsurer is determined by the language of the reinsurance
contract, and the reinsurer cannot be held liable beyond the
terms of its contract merely because the original insurer has
sustained a loss." Id. at 414. At another point in Michigan
Millers, this Court stated:

Although it is true that parties may agree
to such terms in reinsurance as will bind the reinsurer to
the settlement or adjustment of loss made between the parties
to the original insurance, 19 Couch on Insurance 2d, Sect.
80.13, p 631, we will not impose liability on the reinsurer
for a settlement contribution absent such an agreement. [Id.
at 417- 418.]

After careful consideration, we conclude and
hold that the learned trial court erred by reading into the
reinsurance contract at issue in this case a "follow the
fortunes" clause that was not agreed to by the parties.

II

In the light of our holding in the preceding
paragraph, we turn now to a review of the trial courts
ruling by summary disposition that FIC was required under its
contract of reinsurance to indemnify MTPP for $91,500, the full
amount by which the MTPP payments to the village exceeded
$100,000.

In the absence of specific contract language
requiring FIC to indemnify MTPP on the basis of its good-faith
settlement of policy claims, FIC maintains that MTPP did not meet
the burden of showing that it was entitled to reimbursement in
the amount granted. We agree. "[T]he insured bears the
burden of proving coverage." Heniser v Frankenmuth Mut
Ins, 449 Mich 155, 161, n 6; 534 NW2d 502 (1995). Moreover,
"[i]n an action on a policy of reinsurance, the plaintiff is
bound to establish the fact of the amount of loss, which is not
done by proof of payment to the owner of the property."
Appleman, Sect. 7699, p 557. "[T]he true measure of
damages is not what the reinsured has paid, but what he is bound
under his policy to pay by reason of the loss." Id.
at p 558.

It is clear from a reading of the terms of both
MTPPs policy with Thompsonville and its reinsurance
contract with FIC that the parties intended to use "actual
cash value," not to exceed replacement cost, as the basis
for valuing property loss. As evidence of the value of the
sixty-six-year-old former schoolhouse building, MTPP submitted
the deposition testimony of Brian Howard, a claims adjuster with
Adjusting Services Unlimited. Howard emphasized that his work was
only an estimate and not a "true market evaluation." He
figured the replacement cost of the building at $570,058 and then
applied a depreciation factor of seventy-five percent, although
he could not explain why he used this percentage and thought it
was "a bit of an arbitrary thing." Using these figures,
he estimated the actual cash value of the building at $142,514.
FIC countered with a detailed evaluation by the Archer
Construction Co., a local contracting firm. Archer determined the
replacement cost at $422,892, which rendered an actual cash value
of $105,723 by using the same seventy-five percent depreciation
figure. FIC also presented an affidavit by Peter Strongrich,
vice-president of Adjusting Services Unlimited, stating that the
Archer firms cost analysis appeared to be "full and
complete." Presumably, after subtracting the deductible of
$100,000, the indemnification owed by FIC would have been only
$5,723 (plus interest) if, for example, the court were to have
made a determination that the Archer estimate represented the
true cash value of the former schoolhouse.

Because the trial court found the "follow
the fortunes" doctrine to be implied in the contract of
reinsurance, it did not examine the value evidence in a light
most favorable to FIC, as it was required to do, and it made no
factual findings regarding the actual cash value of the former
schoolhouse and its contents. The evidence presented by the
parties raised a genuine issue of fact.

We therefore reverse the trial courts
grant of summary disposition with respect to the amount of
indemnification awarded to MTPP and remand for the trial court to
make factual findings concerning the actual cash value of the
building and its contents.

III

Defendant FIC also contends that it should be
relieved of all liability for indemnification of MTPP on three
grounds: (a) that the former schoolhouse was not specifically
listed as a covered building in the primary policy; (b) that the
building was excluded from coverage under the policy because it
was vacant at the time of the fire; and (c) that MTPP is not
entitled to recover because it failed to submit a timely sworn
proof of loss statement as required by the reinsurance policy. We
conclude that each of these arguments is without merit, and that
the trial court did not err by finding FIC liable for
indemnification under the reinsurance contract.

A

Although the old schoolhouse was situated on
Lincoln Avenue in Thompsonville, its location was described as
101 Thompson Avenue in the schedule of covered buildings
incorporated into the MTPP policy. However, a comparison of this
policy with Thompsonvilles earlier 1985 Transamerica policy
revealed to the trial court the clear intent of the parties to
cover the schoolhouse. The Transamerica policy lists the
schoolhouse as location one, a building constructed of masonry
and insured in the amounts of $181,500 for the building and
$10,000 for its contents. The first listing on the MTPP schedule,
while mistakenly locating the building on Thompson Avenue, lists
the building as masonry and insures it for the identical amounts.
It is undisputed that the Transamerica policy covered all of
Thompsonvilles six buildings in 1985. Evidence showed that
after construction of only one new building in the interim, the
1991 MTPP policy covered seven buildings, one of which must have
been the schoolhouse. Both policies indicated that two of the
insured buildings were of masonry construction, and
Thompsonvilles only two masonry buildings were its
firehouse and the old schoolhouse. We conclude, as did the trial
court, that reasonable minds could not differ regarding the
conclusion that MTPPs 1991 schedule of covered properties
included the old schoolhouse. See Pinckney Community Schools v
Continental Casualty Co, 213 Mich App 521, 525; 540 NW2d 748
(1995).

B

Next, the MTPP policy excluded coverage of
"vacant" buildings, but defined the term as
"containing no contents pertaining to operations or
activities customary to occupancy of the building."
Testimony regarding the actual use of the old building and its
contents, which included tables, chairs, kitchen facilities, and
a piano, reflected its function as a community center. The trial
court did not err by finding that while the building may have
been unoccupied at the time of the fire, it was not vacant within
the meaning of the term under the policy. See Giordano v
Markowitz, 209 Mich App 676, 678-679; 531 NW2d 815 (1995). [2]

C

Third, in opposing MTPPs motion for
summary disposition on the issue of damages, FIC argued for the
first time that MTPP was not entitled to coverage because it
failed to submit a sworn proof of loss statement within ninety
days after the loss. MTPP countered that this condition had been
waived. We agree. While the trial court did not specifically
address this argument, this Court may consider a legal question
not determined by the lower court if the facts necessary for its
resolution have been presented. Miller v Inglis, 223 Mich
App 159, 168; 567 NW2d 253 (1997).

We find that FIC waived the defense of failure
to provide sworn proof of loss. In its answer to MTPPs
complaint as intervening plaintiff, the reinsurer did not plead
this defense "specifically and with particularity," as
required by MCR 2.112(D)(2). See Lawrence v Will Darrah &
Assoc, Inc, 445 Mich 1, 4 n 2; 516 NW2d 43 (1994).
Furthermore, FIC did not raise this defense in its motions for
summary disposition against Thompsonville or against MTPP.
Generally, once an insurance company has denied coverage to its
insured and stated its defenses, the insurer has waived or is
estopped from raising new defenses. See Johnson v Yorkshire
Ins Co, 224 Mich 493; 195 NW 45 (1923); Popa v Northern
Ins Co of New York, 192 Mich 237; 158 NW 945 (1916); In re
Smith Estate, 226 Mich App 285, 290; 574 NW2d 388 (1997).

Finally, FIC argues that the trial court erred
by imposing a sanction against FIC because it brought a motion
for reconsideration of the courts ruling on damages. A
trial courts finding that a claim or motion is frivolous is
reviewed on appeal for clear error. See LaRose Market v Sylvan
Center, 209 Mich App 201, 210; 530 NW2d 505 (1995). In light
of our remand, we find that FICs motion for reconsideration
was not frivolous, and we reverse the trial courts grant of
sanctions.

Affirmed in part, reversed in part, and
remanded for proceedings consistent with this opinion. We do not
retain jurisdiction. Because in this appeal neither party has
prevailed in full, neither party may tax costs pursuant to MCR
7.219.

/s/ Robert P. Griffin
/s/ Maura D. Corrigan
/s/ Barbara B. MacKenzie

FOOTNOTES:

[1]Under California
law, the doctrine may be implied in a contract of reinsurance by
evidence that a custom or usage exists to "follow the
settlements" of the reinsured. National American Ins Co
of California v Certain Underwriters at Lloyds London,
93 F3d 529, 537 (CA 9, 1996).

[2] We note that although FIC presents the question of
vacancy in its Statement of the Questions Involved and argues the
issue in its brief on appeal, it also indicates in a footnote in
its Revised Statement of Facts that it is not appealing the issue
of vacancy.